Inversion: UK versus Ireland

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July 29th, 2014

This WSJ article explains why UK can be more attractive than Ireland as an inversion location.

Record-Low Bond Yields

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July 29th, 2014

Bond yields continue to decline for now -  FT update here.

 

 

Survey on Economy in Ireland

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July 22nd, 2014

Seamus Power, a PhD student at the University of Chicago, is conducting a short survey on the economic situation in Ireland. The link is here if you are willing to fill it out. There is also an email address for the study if you have questions or comments.

“You will be asked to read a very short narrative and asked some questions based on it. Participation is voluntary and is expected to take 5 minutes.”

Interest-only mortgages in Ireland

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July 16th, 2014

Economic Letter from the Central Bank here.

Mody: Did the German court do Europe a favour?

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July 16th, 2014

Here.

Finance in the run-up to WW1

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July 9th, 2014

Harold James provides the latest addition to the VoxEU series on WW1, here.

Orphanides: the Eurozone crisis is political

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July 8th, 2014

Here.

Money quote:

European Institutions also face the risk of political capture by the governments of specific member states that could misuse the crisis for local political gain.

 

IGEES paper: Structural Reform

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July 8th, 2014

See here.

Welcome to the Everything Boom, or Maybe the Everything Bubble

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July 7th, 2014

Neil Irwin writes in the NYT here.

Irish Times: New Finance chief told junior official to disregard property crash fears

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July 4th, 2014

Interesting short article in today’s Irish Times.

 

 

Reminder: Labour Markets During Crises Conference on Wednesday

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June 30th, 2014

The Labour Group at NUI Maynooth is holding a one-day conference on Labour Markets During Crises on Wednesday, July 2. Here is a link to updated information that now includes links to all five papers.

All are welcome, but please email if you plan to attend.

SME Market Report

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June 29th, 2014

I was, rather lazily, waiting for someone else to post this, but the SME market report by the Central Bank is an important new resource, complete with data and tables in usable formats. The report is good collage-type work that deserves an airing. Let’s hope we see follow up reports in the same manner to give us a better picture of how the sector is evolving post-bailout.

Summer 2014 Issue of ESR

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June 28th, 2014

CSO: Implementing New International Standards for National Accounts and Balance of Payments Statistics

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June 27th, 2014

Required reading here.

NERI Summer 2014 Quarterly Economic Observer

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June 26th, 2014

Here.

IMF: Spillovers in International Corporate Taxation

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June 26th, 2014

Here.

WW1 and international migration

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June 25th, 2014

The latest contribution to the VoxEU series on the economics of World War I is available here.

Rethinking IMF Approach to Sovereign Debt Crises

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June 22nd, 2014

This paper is important in understanding the evolution of IMF thinking on the handling of sovereign debt crises: here.

Piketty in Ireland

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June 21st, 2014

RTE’s PrimeTime interview is here.

Patrick Honohan’s talk from TASC’s Piketty session is here.

Sean Byrne’s book review in DRB is here.

Summer Book List

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June 18th, 2014

Dear readers, could we have some recommendations for books for summer holidays in the comments?

If you leave a link to the amazon page (or whatever), that is perfect, but the blog’s software will stop more than one link being posted at a time.

This is totally uncorrelated to my own upcoming holiday. Honest.

(Like Ronan’s last post, I’ve read Piketty’s Capital and thoroughly enjoyed it, though the man really could have done with an editor).

Thomas Piketty and the subsidy of leverage

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June 18th, 2014

Over the weekend, the Irish Times led with eye-catching headline “Piketty says [Ireland's] property tax unfair and should be altered“. The juxtaposition of Piketty, arguably the world’s most talked about economist in 2014, and Ireland’s property tax, possibly the smallest property tax of any developed country, is due to Piketty’s presence in Dublin this Friday to talk at TASC’s annual conference.

Piketty’s point is that property tax – a tax on the most prevalent form of wealth – takes no account of debt, mortgages being the most prevalent form of debt. In his own words:

“I think if you have a house that’s worth €400,000 but you have a mortgage of €390,000, you know you’re not really rich. Your net wealth is €10,000 and you are paying back in interest payments as much as a tenant will pay in rent. So there’s no reason why you should pay as much property tax as someone who inherited his €400,000 house or who has finished reimbursing his mortgage 20 years ago.”

I have to admit that I cannot agree. My problem with this line of argument is that it is effectively a subsidy of leverage. This is something Ireland is consciously moving away from (for obvious reasons), in particular with the end of Mortgage Interest Relief.

Not that there is no debate to be had. Net wealth and gross wealth are separate concepts and it is certainly possible to consider which we might want to tax and why. However, taxes change behaviour and if you say to an economy “we will give you a tax rebate for every euro of debt you take on”, then if Ireland has €350bn in residential real estate, we should not be surprised if as a society that becomes our target for mortgage debt. While Thomas is correct to point out that net wealth is different to gross wealth, we should not forget that ignoring gross amounts and balance sheets is a large part of what got us (for us, read Ireland or world economy, as you choose) into this mess in the first place.

Perhaps more importantly, we tax property for a reason. That reason is that society is trying to recapture some of the wealth that it has created for private individuals, which is reflected in land values. (I am side-stepping one important issue for the moment, the property tax vs. land tax argument – as William Vickrey, 1996 Nobel Prize laureate in economics, noted: “The property tax is, economically speaking, a combination of one of the worst taxes, the part that is assessed on real estate improvements and one of the best taxes, the tax on land or site value.”)

So, the taxation of built capital aside, the taxation of land values is not just an arbitrary additional means of generating revenue. It is unique, in not affecting our behaviour, and in capturing pure economic rent. In the words of another Nobel Laureate, James Mirrlees:

Taxing land ownership is equivalent to taxing an economic rent – to do so does not discourage any desirable activity. Land is not a produced input; its supply is fixed and cannot be affected by the introduction of a tax. With the same amount of land available, people would not be willing to pay any more for it than before, so (the present value of) a land value tax would be reflected one-for-one in a lower price of land: the classic example of tax capitalisation.

If you alter that, by saying “you can borrow to buy land and not have to pay tax”, unsurprisingly you no longer have a uniquely beneficial tax. Clearly, we are far from land value tax in Ireland but the principle remains.

Even if one does not accept the argument that property tax is a charge on services provided by the state, there is a fundamental difference between a renter and a mortgage-holder: only the latter is buying a ticket to future wealth (in net terms, you already have it gross terms). At least two effects occur when you give debt-rebates for property tax. The first is increased leverage, as mentioned above.

The second is distributional and thus perhaps of even greater interest for Friday’s TASC conference. For example, in the case of Ireland, there are (very roughly) a third of households owning without a mortgage (the richest third), another third with mortgages and the final third living in rented accommodation (by and large the poorest third).

If you give a tax rebate to the middle group – who, remember, have wealth that the poorest third do not have – then by definition the other two groups have to pay more in tax to compensate (assuming that there is some fixed target for government revenues).

This doesn’t mean that I am unsympathetic to Ireland’s negative equity generation. Indeed, in the report I prepared on introducing Land Value Tax in Ireland in early 2012, I outlined precisely how one might take account of legacy negative equity in the new property tax system. But good policy should be future-proof – and can then be tweaked to take account of current circumstances. And given that it should be a major goal of policy to prevent huge negative equity from ever happening again, it seems odd that we would institutionalise this feature.

They say the best tax is an old tax. Failing that, the best tax is probably a simple one. Taxing the value of property (or ideally the value of land) is simple. Introducing tax rebates for debt – however well-intentioned – turns it into a game where everyone wants to minimise their tax liability (in this case by increasing their debt liabilities). For me, that’s not the way to go.

P.S. As is now customary for blogging economists (and perhaps soon mandatory), I feel I should reveal whether or not I’ve read Piketty’s book! It’s my book-of-the-month for June and I’m about 1/3 of the way through.

Too early to call the end of the eurozone recession…

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June 17th, 2014

…says the CEPR Business Cycle Dating Committee, here.

Latest Irish Fiscal Advisory Council report out

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June 17th, 2014

Here.

It is summarised in the FT by Vincent Boland, and the detailed appendices are worth reading, particularly the discussion of the estimation of potential output.

Is our banking inquiry nobbled before it starts?

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June 16th, 2014

Independent TD Stephen Donnelly has resigned from the committee of TDs and Senators charged with investigating the banking crisis. This follows a week where the government lost a vote, then rammed home changes to the composition of the inquiry committee to ensure it had a majority.

The reasons why the government lost the vote aren’t really that important. Remember both Houses held full debates on the establishment of the banking inquiry and the Government then unilaterally amended the motion that established the inquiry when it was clear it wouldn’t have a majority. It could have simply said ‘yeah we messed up, but you, know, custom and practice, lads’, and moved on, or allowed the inquiry to proceed unmolested, but then the Taoiseach defended the action to impose a majority, claiming the government wouldn’t have enough control over the inquiry:

you [presumably the government] need to able to approve terms of reference, a work schedule, and you need to able to approve a report at the end of it.

It all kicked off, and Donnelly resigned. There were some tense exchanges between Deputy Donnelly and Minister Leo Varadkar on radio on Sunday morning. Since then the polls tend to show support for Donnelly’s decision.

There have been several direct and indirect investigations into the circumstances surrounding the banking crisis. The Honohan report, for example, looked at regulation but obviously delved deeply into banking matters as well. None of these investigations have taken place in public, and none dealing with the ‘run up’ to the banking crisis, from the late 1990s to 2013 when we exited the bailout, or from 2002 to 2013. Colm McCarthy has a good post on why the terms of references should extend that far back.

The credibility of any findings from the new banking inquiry have clearly been called into question. Colm gives an explanation for the clear need for another inquiry:

The inquiry should explore whether any warnings were voiced within the banks, and whether the banks paid any attention to the warnings available from other sources. It should also explore the failure of international monitoring by bodies such as the European Commission, the IMF and the OECD, all of which produced excessively complacent assessments in the years leading up to the crisis.

Colm finishes with the sentiment I think we’d all hope the inquiry leads us to:

The inquiry is about accountability, not about dishing out retribution.

And yet, following last week’s events, commentators can’t help asking every government and opposition talking head what the ‘real’ reason behind the banking inquiry is.

As usual, Miriam Lord put it best, this might well simply turn out to be the Oireachtas Committee on Embarrassing Fianna Fáil over the Banking Crisis.

Accepting that there will be no rowing back of the appointment of the two Senators, in the interests of increasing the credibility of the final report, there are two remedies I can see. The first is that one of the newly appointed Senators resigns and is replaced by Stephen Donnelly, without any admission of guilt on the government’s behalf. This partially restores the credibility of the committee while co-opting Donnelly back onto the committee, which really could use his advice and expertise.

The second is for the non-governmental committee members to resign en masse once they’ve seen the terms of reference, especially if they don’t like what they see, particularly in terms of the time frame the inquiry will cover, the role of the banks, regulators, and the media in the run up to the crisis, and processes to ensure accountability trumping retribution.

Update (Wednesday 18th): Well, that’s that then.

Shadow Finance – China

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June 15th, 2014

The FT begins a series on shadow finance by reporting on trust funding in China – here.

US tech and pharma park cash offshore

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June 12th, 2014

FT analysis here.

Worth a Try: A Statistical Analysis of Brian O’Driscoll’s Contribution to the Irish Rugby Team

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June 12th, 2014

here.

IMF Global Housing Watch / BIS Property Price Data

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June 12th, 2014

New IMF housing data and research page here.

New BIS property price data also:

Will there be a “state aid” investigation?

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June 11th, 2014

RTE is reporting that

[t]he European Commission is to open a formal investigation into Apple’s tax arrangements with Ireland.

An announcement is expected to be made by Competition Commissioner Joaquin Almunia tomorrow.

If the Commission decides not to progress with an formal investigation there would only be a limited reputational bump for Ireland but there would have been benefits in terms of reduced uncertainty.  If a formal investigation is announced it is bad news for the certainty of the Irish corporation tax regime.

The best outcome for Ireland would be a short (< 12 months) investigation.  The actual outcome would, perhaps surprisingly, not be the most important factor. 

If there was to be an investigation and it concluded with no negative finding against Ireland it would be a useful counter-punch to some of the accusations directed at Ireland but it would be far from the end of the mudslinging.  If there was to be a finding of improper state aid against Ireland then due process would need to be followed with whatever redress and rectifications required undertaken. 

An adverse finding on state aid could hardly make Ireland’s tax reputation worse.  The key is that Ireland needs any investigation to be quick.  This will not happen.  Any investigation, if undertaken, will drag on for several years.

RTE further report that any investigation is likely to focus on Apple.  If this is the case it suggests it will be a very narrow  investigation as Apple has limited operations in Ireland.  Apple does have Irish-incorporated companies as part of its global tax structure but those companies (ASI, AOI and AOE) have almost no operations in Ireland.  It is hard to see how Ireland can confer tax advantages on companies that are not subject to Irish Corporation Tax.  These companies were found to be ‘stateless’ for tax purposes but that is down to a mismatch between the residency rules of Ireland and the US rather than any unique advantage Ireland offered to Apple.

If the Commission is to investigate the taxation of Apple in Ireland it will likely relate to the Irish-source profits generated by Apple’s operations in Cork.  This is a relatively insignificant element of Apple’s overall global tax structure.    Apple Inc. does not have significant cost-sharing and/or transfer-pricing agreements  with its operations actually in Ireland. 

Apple does have such agreements with the Irish-incorporated companies at the centre of its tax structure but these companies operate out of Cupertino, California not Hollyhill.  The Revenue Commissioners have no jurisdiction over these agreements and only have jurisdiction over these companies to the extent they have operations, if any, in Ireland.

Unlike other US MNCs, Apple does not pass the revenue from its non-US sales through Ireland.  The 4,000 or so staff that Apple have in Cork do contribute to the company’s profits but they do not handle Apple’s global sales in the same way, for example, that the revenues from Google’s global sales are routed through Ireland.  The Revenue Commissioners do have jurisdiction over the profits sourced from Apple’s Irish operations but these are small in the overall scheme of the company.

Apple’s original decision to locate in Cork in 1980 was likely influenced by the particular tax advantages offered at that time and it has been reported that these were augmented by further changes when the original 10-year period expired in 1990.  It is not clear how the arrangements put in place in 1980 and 1990 are related to the Commission’s investigation which has the scope to look into the previous ten years.

The initial informal action by the European Commission was prompted by last May’s US Senate hearing on Apple’s global tax strategies.  The opening paragraph of the Senate report stated that:

The hearing will examine how Apple Inc., a U.S. multinational corporation, has used a variety of offshore structures, arrangements, and transactions to shift billions of dollars in profits away from the United States and into Ireland, where Apple has negotiated a special corporate tax rate of less than two percent.

A “special corporate tax rate of less than two percent” would be state aid.  But there is no special corporate tax rate of two percent.  It is unlikely that the Commission investigation relates to special rates for Apple but if there is to be an a formal state aid investigation announced then one would assume that there is something that concerns the Commission.  Whether this justifies a formal investigation remains to be seen.  It may also be the case that the scope will be broader than just a single company.

In reality it doesn’t matter what the investigation is actually about.  The mere announcement, and then the subsequent length of the formal investigation, matters.  A formal investigation will be a huge cloud over the Irish Corporation Tax regime and the uncertainty it generates will be a substantial stumbling block for anyone trying to promote Ireland as a potential FDI site. 

One would hope that the purpose of the announcement is backed by more than the desire to create such a stumbling block.  Of course, if there is more substance behind the possible investigation rather than pure idle speculation about ulterior motives then it means that Ireland may have a case to answer.  The problem is we will be waiting some years to find out if it does go ahead.

TASC Conference on 20th June

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June 10th, 2014

TASC’s Annual Conference (‘The Challenge of Economic Inequality to Recovery and Wellbeing’) is taking place on Friday 20th June in the Hogan Suite, Croke Park Conference Centre. Places remain for the afternoon keynote address by Professor Thomas Piketty, with a response by Professor Patrick Honohan and discussion session.

The afternoon session will begin at 2pm sharp, with people asked to take their seats at 1.45pm, as Prof. Piketty is flying in and out on the same day. Booking details are available here.

The full conference programme is here.

(Although the morning session is fully booked, TASC will also be video-recording all sessions and making these recordings available via our website afterwards. If someone is strongly interested in attending the morning session, they should contact Nat O’Connor on noconnor@tasc.ie)